Failed ADP test discovered late

[ConnieStorer]

I have a 401(k) Plan (for Co. A) that provides the Safe Harbor Basic Match.  No problem until I found out about another company, (Co. B) that the Plan Sponsor owns 100%.  Co. B does not sponsor a Plan.  The owner of both Companies takes wages from both.  Not an issue with my tests on Co. A but a major issue if I test Co. B on a stand alone basis due to the Owner's deferrals to the Co. A Plan.  

Co. B was purchased in 2022 so I am not worried about 2022 or 2023.  The testing failures come into plan for 2024 and 2025.  I am testing the entire controlled group as a single Plan as I do not think there is any other option unless the Owner's full deferral is returned for both of those years. We can pass 410(b) without an issue due to the number of HCE's in Co. B.

My big question... unless someone out there thinks my summary above is flawed, is regarding the one to one QNEC to be provided to Co. A's NHCE's.  Is that allocated to those eligible for the year of the failure, 2024?  Or, do I have the option of allocating the QNEC based on wages and eligibility for 2025?

Also, eligibility for Profit Sharing is 1000 hours and EOY.  My understanding is that the same would apply to the corrective contribution.

Thank you in advance for your assistance.  I thankfully deal with failed ADP tests very infrequently.

[BG5150]

It's not too late to correct 2025.  They just owe a penalty tax.

[ConnieStorer]

Thanks BG5150.  My question was strickly on the 2024 Plan Year.

I calculated the penalty and return of deferrals separtely for 2025.

[C. B. Zeller]

Not sure I understand the situation. You said that the 401(k) plan passes coverage since company B (whose employees are not eligible) has a high proportion of HCEs. The plan meets the safe harbor requirements because every employee who is eligible to defer is also eligible for the safe harbor contribution, so no ADP test is needed. Where is the failure?

[David D]

@C. B. Zeller  Was just about to make the same comment

[Paul I]

@ConnieStorer could you clarify if the owner is making deferrals based on wages from both companies A & B, or based solely on wages from Company A?

[ConnieStorer]

Hi Everyone,

The owner is making deferrals on the wages from Company A, not Company B.  I wanted to test each Co. separately in order to maintain the Safe Harbor for Co. A but I thought I was required to include the Deferrals that the Owner made to the Plan of Co. A when testing benefits in Co. B.  The Owner is the only Participant who is paid from both Companies.

[C. B. Zeller]

Companies aren’t subject to the ADP test - plans are. There is only one plan in place here and it satisfies all the required tests.

You might be thinking of the rule under IRC 401(k)(3)(A) which says that if an HCE is a participant in more than one 401(k) plan of the same employer, then you include their deferrals on both plans’ ADP tests. In your case there is only one plan so this rule is not applicable.